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September 2018

CREATING THE CLIMATE FINANCE LEADERS OF TOMORROW

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Countries worldwide and in particular emerming countries, have to find new innovative financial means to mitigate and adapt to the numerous effects of climate change. The newly created international climate finance accelerator (icfa), a public-private partnership, is a key example of luxembourg’s efforts to bring the public and private sectors together with the aim of creating future leaders of fund managers investing in climate finance and increase the number of climate finance investment funds.

On the occasion of the first edition of the sustainable finance forum luxembourg last may, it announced the first cohort of international asset managers to join the accelerator. We spoke with the winners, all currently raising capital, to learn more about their innovative key projects and the added value of getting off the ground with the help of ICFA.

ACCELERATING CLEAN ENERGY GROWTH FOR ALL

The clean energy revolution is here, but for countries most in need, the transition is far too slow. Electricity consumption in developing countries is 20-100 times lower per capita than in the OECD. While these countries hold significant renewable energy potential, the lack of international equity and debt finance available for decentralised generation is a major hurdle.

Oslo- and Nairobi-based Empower New Energy, a renewable energy impact investment fund, was created in early 2017 to find a solution to the financing gap of the smaller scale projects. Over the next two years, it intends to raise over 200 million USD to finance growing portfolio of small and medium-sized solar and hydropower projects in Sub-Saharan Africa, leading to verifiable CO2 reductions, job creation and community development. Terje Osmundsen, CEO and one of the two founders explains: “Today, non-recourse project finance in emerging countries is the main solution for financing renewable energy projects, which works well for large scale projects of 40-50 million USD upwards but is not suited for small and medium-sized, because of the time and high transaction costs.”

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Today, non-recourse project finance in emerging countries is the main solution for financing renewable energy projects.

Terje Osmundsen

Financing problems are to be added to a lack of know-how and resource among local developers, utilities and regulators combined with a lack of transparency, fear of corruption and illegitimate use of climate funds.

“Governments and business communities continue to invest mainly in fossil fuel generation to meet their energy demands due to the lower investment cost, even if the total lifetime cost surpasses that of renewables,” explains Osmundsen.

“Our business model is to apply our standardised project evaluation, financing and management tools for investments in small and medium scale renewable energy projects. We bundle investments into a portfolio of projects. When projects are built and has been in operation for a period, we raise green bonds to refinance the portfolio of quality solar PV and small hydro projects which span over multiple off-takers and countries,” he adds.

Structured as an impact accelerator vehicle, investment money is deposited for channeling down to each of the project special purpose vehicles in the project portfolio. Investors ranges from DTIs to private impact investors while the sweet spot for investing is 1 to 10 million USD per project.

Empower’s CEO explains that ICFA’s support and coaching will be of valuable importance in the creation process of the fund. “Building up an investment fund management business in a new area like climate finance requires a lot of time and resources, the possibility to get technical and financial support is extremely valuable.”

HYDRO POWER GENERATION

Accelerating the clean energy revolution is also the focus of Serimus Hydro, a Luxembourg-based asset manager focusing on small hydroelectric power plants. There is a clear need to focus on that technology, especially when it comes to small hydropower assets below 10 MW that are decentralised assets existing in many places worldwide,”explains its Managing Director, Frédéric Brodach.

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“We’ve hardly seen any fund that is exclusively focused on hydro power, despite the fact that the CO2 emissions of a hydropower, over its entire lifetime, are lower than any renewable energy technology.”

Frédéric Brodach

Small hydropower is a clean, renewable, and predictable energy source. “It is the largest renewable force in the world,” he adds.

Its lifespan that can reach up to 80 years makes it interesting to long-term investors.

“It is often attractive for family offices, foundations and pension funds. Those will be the kind of investors we will speak to,” he adds.

The Serimus Hydro Fund will finance the development and construction of new hydro power plants as well as the modernisation and operation of existing plants in Europe and Latin America, a geographical zone where the International Energy Agency considers that 72% of the technical potential of hydro power is not exploited to date. Current main projects focus on Austria and Chile.

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“We’ve hardly seen any fund that is exclusively focused on hydro power, despite the fact that the CO2 emissions of a hydropower, over its entire lifetime, are lower than any renewable energy technology.”

Small hydropower is a clean, renewable, and predictable energy source.

“It is the largest renewable force in the world,” he adds. Its lifespan that can reach up to 80 years makes it interesting to long-term investors. “It is often attractive for family offices, foundations and pension funds. Those will be the kind of investors we will speak to,” he adds.

The Serimus Hydro Fund will finance the development and construction of new hydro power plants as well as the modernisation and operation of existing plants in Europe and Latin America, a geographical zone where the International Energy Agency considers that 72% of the technical potential of hydro power is not exploited to date. Current main projects focus on Austria and Chile. “Investors interested in this niche sector require specific technical know-how,” he highlights. To address this need and to securely access satisfying deal-flow, the asset manager includes a team of specialised German engineers with a cumulated hydrorecord of more than 40 years.

“Our role will be to bundle several smaller projects, to bring them to the state-of-the-art technical standards, and to invest in order to ensure full compliance with stringent environmental regulation. At the end of the fund’s 12-year lifetime aggregated, digitalised and standard ised projects will be sold off to investors that have less technical knowledge or market access in those regions. We will pursue and measure verifiable social and environmental impact targets,” explains Brodach.

Benefitting from Luxembourg’s networks of experts in the field of sustainable finance is a key element praised by Serimus Hydro’s Managing Director.“In Luxembourg, you have access to all the service providers in a very small perimeter. It doesn’t take you much time to connect with each other and to get everyone working in the same direction. There is also a clear focus when it comes to green finance. It is a very good place to do business.”

CLIMATE ADAPTED, SOCIALLY INCLUSIVE AGRICULTURE

“ICFA was our first financial and technical backer for the Akipeo Fund. It accelerated our visibility and gave us additional credibility as it attracted tremendous interest. We are moving faster than we could have done without their support,” explains Serge Mayaka, Founder and Managing Principal of Akipeo Inc, the Toronto-based capital advisory firm launching the Akipeo Fund. The Akipeo Fund will invest in businesses and projects that enable climate smart and socially inclusive agriculture in Sub-Saharan Africa, while enhancing food security and livelihoods.

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Africa’s long-term stability, growth and resilience is critically dependent upon food production and land use that is adapted for current and accelerating climate and population pressures.

Serge Mayaka

“We will do this in ways that leave countries and communities with a greater share of the economic benefits of the renewable natural resources they depend upon, and with those resources managed for the long term in a more efficient and climate smart manner,” explains Mayaka, whose Kenyan origins makes Africa a region dear to his heart.

“It is the most compelling region in terms of risk to climate. Agriculture and soft-commodities are critically important in Sub-Saharan Africa, in terms of employment and income generation, food security. Africa’s long-term stability, growth and resilience is critically dependent upon food production and land use that is adapted for current and accelerating climate and population pressures,” he adds.

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Africa’s long-term stability, growth and resilience is critically dependent upon food production and land use that is adapted for current and accelerating climate and population pressures.

Serge Mayaka

The Fund’s investment themes will be centered on production models and input efficient agricultural technologies and that enable more food to be produced on less land, as well as keeping more of what’s made by addressing food spoilage via handling and storage assets between production and markets. The fund will also focus on emerging opportunities to meet growing regional and global demand for protein, such as sustainable aquaculture, and on the restoration and use of degraded lands for food production.

The common thread in these investment themes is on managing down the amount of land required to produce the food required to meet rapidly growing consumption needs, all while maintaining or increasing current income, and adapting long-term to the impact of climate change on what can be efficiently produced in different regions.

“These solutions require significant innovation and blended capital to implement new production practices and manage various risks while targeted impacts take hold, and to monetise the environmental assets that are created over time. It is a very active investment strategy, before and after initial capital deployment,” he adds.

“We have a lot to do, and we will not achieve our goals on our own. With the ICFA and the broader Luxembourg sustainable finance ecosystem we have access to the types of partners and support we need for the Akipeo Fund.”

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With the ICFA and the broader Luxembourg sustainable finance ecosystem we have access to the types of partners and support we need for the Akipeo Fund.

TRANSFORMING FARMING THROUGH TECHNOLOGY

While Africa has been long attractive for direct investments, growing opportunities are arising in South-East Asia as exemplified by UBERIS, a venture capitalist using

smart technologies to disrupt established supply chains models in South-East Asia including countries such as Cambodia, Vietnam, Laos, Myanmar, Philippines and

Indonesia. UBERIS backs high-growth young social enterprises with both an environmental and social impacts in sectors such as smart agriculture, access to energy and clean water.

It is the only fund whose sole focus is on Southeast Asia, a territory with more than 3 decades of economic growth but lagging behind in terms of impact investing.

“Technology plays a key role in developing impact investing and helping small and medium companies (SMEs) grow their businesses,” explains its CEO, Cyrille Antignac.

“FinTech and Digital technologies are a backbone for innovation. Blockchain technologies play a key role allowing more inclusive supply chains and easier access to markets,” he adds.

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Technology plays a key role in developing impact investing and helping small and medium companies (SMEs) grow their businesses.

Cyrille Antignac

Key example is a project aimed at providing digital services to farmers in Myanmar, a country that leapfrogged from no to full connectivity and 100% smartphone use within less than 3 years.

“Having access to mobile phone applications enable farmers to access financing or make mobile payments. They can address their lack of access to high-quality information about weather, growing conditions and leverage connectivity to improve their harvest. In the end, they are more efficient in their work and enjoy greater financial stability and independence,” adds Antignac.

The visibility given by the accelerator is also a key element for Cyrille Antignac who highlights Luxembourg’s efforts and influence in the field of climate finance.
“It is very good to have an accelerator for impact funds as the sector is small and support must go in priority to impact fund sponsors in order to help social ventures ultimately”.

BRIDGING THE ADAPTATION GAP

Increased frequency of extreme weather events is putting the limelight on the actions taken to anticipate the risks arising from climate change and minimise their damage.

This is the key role of the Climate Resilience and Adaptation Finance & Technology Transfer Facility (CRAFT) concept proposed by The Lightsmith Group, an investment company specialising in sustainable investments targeting superior returns. CRAFT is the concept for the first commercial investment vehicle to focus on expanding the availability of technologies and solutions for climate adaptation and resilience. Focus areas include energy, water, food and agriculture, and climate resilience solutions.

“We believe that adaptation demands the same attention and urgency for climate action that mitigation does,” highlights Jay L. Koh, Co-Founder and Managing Director of The Lightsmith Group.
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We believe that adaptation demands the same attention and urgency for climate action that mitigation does.

Jay L. Koh

Investors are becoming more and more aware and interested in managing their own climate risks with an increased attention into the potential to invest in resilience. A study released by the Global Adaptation & Resilience Investment Working Group (GARI) shows that over 70% of private investors surveyed see both risk and investment opportunity from the impact of climate change. Nevertheless, only a limited amount of in vestment has been targeted against the problem.

“Adaptation will require us to understand exactly how climate change is likely to increase different types of risks. Our idea is to invest in growth-stage companies that have already analysed many of these risks and provide them with capital to scale up their technologies globally in areas such as supply chain analytics, weather modeling, precision agriculture or water efficiency,” he adds.

The intentional inclusion of technology transfer from developed to developing countries into the fund concept will help build capacity in developing countries. As demand builds, investee companies can also begin to expand into lower income countries. Koh highlights the added value of benefiting from the unrivalled fund expertise available in Luxembourg through the accelerator.

“The deep expertise of Luxembourg around the creation, management and monitoring of an investment fund strategy is very useful, particularly in early stages of the development of new investment strategies.”

ADDED-VALUE FOR THE INSURANCE SECTOR

As climate change risks are rising, insurers must adapt to climate change while better data can help them price more accurately climate risks.

“As an example, the catastrophe modeling industry helps the insurance and re-insurance industry to determine how to underwrite insurance policies. Investing in companies that can help analyse these kinds of risks is a useful way of increasing their capabilities as the problem of extreme weather gets larger,” explains the CEO of The Lightsmith Group.

“This can be applied to other sectors beyond the insurance and the re-insurance sectors that can use that same kind of models to help people in sectors such agriculture, real estate or infrastructure as the need for risk analysis data and technology becomes larger because of climate change. The community of innovators in the heart of Europe has huge potential value to addressing climate change,” he concludes.

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The deep expertise of Luxembourg around the creation, management and monitoring of an investment fund strategy is very useful, particularly in early stages of the development of new investment strategies.

Jay L. Koh